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Unformatted text preview: Environmental Economics Notes David L. Kelly Department of Economics University of Miami Box 248126 Coral Gables, FL 33134 dkelly@miami.edu First Version: Fall, 2009 Current Version: Fall, 2011 INTRODUCTION I What is Environmental Economics? Environmental economics is the study of how the economy affects the environment, how the environment affects the economy, and the appropriate way to regulate economic activity so as to achieve an optimal balance between competing environmental and economic goals. 1. The economy affects the environment: U.S. carbon emissions are forecast to drop by 5% due to the recession. In many cases, wealthy countries have lower pollution emissions (despite their greater GDP), as wealthy countries can afford expensive pollution control tech- nologies. 2. The environment affects the economy: Warming from climate change affects the skiing industry. Sulfur dioxide and particulate emissions can increase asthma, increasing sick days, which reduces GDP. 3. The appropriate way to regulate: The Waxman-Martin climate change bill proposed regulating greenhouse gas emis- sions in part with a cap-and-trade with a safety valve. The government would issue permits to emit greenhouse gasses, which firms can buy and sell. But if the trade price gets too high, the safety valve kicks in and more permits are issued, to keep the price of permits from rising beyond a certain point. Is this the least expensive way to reduce greenhouse gas emissions? The house bill has other provisions. It imposes a technology standard: new build- ings must meet certain energy efficiency requirements. Is this the least expensive way to reduce greenhouse gas emissions? An effective ban on incandescent light bulbs goes into effect at the end of the year (see article). Is this the least expensive way to reduce greenhouse gas emissions? 4. Achieving an optimal balance: 1 Nylon production produces nitrous oxide, a greenhouse gas which is much more warming than carbon dioxide. To eliminate emissions costs about $10-20 million per factory for scrubbers, plus catalysts that cost $1 million per year. Is the benefit of reduced nitrous oxide emissions worth the cost? In Baltimore, reducing total suspended particulates (TSP) in the air from 115 micrograms per cubic meter to 87 micrograms costs approximately $15 million. Is the benefit worth the cost? Although the subject name is often accused of being an oxymoron, in fact the connection is clear. Environmental economics takes environmental problems identified by scientists and answers the question what should we do about it? II Topics Within the above general ideas are many topics to study: Can the market economy achieve an optimal balance between nitrous oxide scrubbers and other things we might care to produce? If not why?...
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